Health Care Costs

DMHC Rate Review Helps Control Costs

Since January 2011, the DMHC has saved Californians hundreds of millions of dollars in health care premiums through its premium rate review program.

Under state law, proposed premium rate changes for individual or small group health plans must be filed with the DMHC. Department actuaries perform an in-depth review of these proposed changes and ask health plans questions to ensure that the proposed rate changes are supported by data including underlying medical costs and trends. The DMHC does not have the authority to approve or deny rate increases; however, its rate review efforts hold health plans accountable, ensure consumers get value for for their premium dollar and saves Californians money.

If the DMHC finds a health plan rate change is not supported, the Department negotiates with the plan to reduce the rate change, called a modified rate. If the health plan refuses to modify its rate, the Department can find the rate to be unreasonable.

Health Coverage Market Types

Individual

Health coverage offered to individuals who purchase it on their own rather than as part of a group (i.e., through an employer).

In the individual market, health plans update premium rates annually, usually on January 1st of each year. Health plans must notify consumers of any change in what they will be charged at least 10 days prior to the start of the annual enrollment period or 60 days before the change takes place, whichever is earlier.

Under state law, proposed rate changes for this market must be filed with the DMHC to ensure the proposed rate changes are supported and not unreasonable. If the DMHC finds a proposed rate change unreasonable, the health plan must notify the impacted members of the unreasonable finding.

Health coverage offered to small businesses that have 1 to 100 employees.

In the small group market, health plans generally update premium rates quarterly. Small businesses that purchase coverage are charged a consistent rate for a period of at least 12 months. Health plans must notify small businesses of any change in what they will be charged at least 60 days before the change takes place.

Under state law, proposed rate changes for this market must be filed with the DMHC to ensure the proposed rate changes are supported and not unreasonable. If the DMHC finds a proposed rate change unreasonable, the health plan must notify the impacted small businesses of the unreasonable finding.

In the large group market, health plans generally update premium rates annually. Large group employers that purchase coverage are charged a consistent rate for a period of at least 12 months. Health plans must notify businesses of any change in what they will be charged at least 60 days before the change takes place. Health plans are also required to notify businesses of how their average rate increases compares to both Covered California and CalPERS products.

For reference the 2020 average rate increases for both CalPERS and Covered California are provided below:

Beginning October 1, 2016, and annually thereafter, health plans are required to file large group aggregate rate information with the DMHC. The DMHC does not review large group rates, but holds a public meeting in accordance with statute to increase transparency.

Contributing Factors to Health Plan Premium Costs

Health plans determine health care costs by evaluating the price of services and how often those services are used by members, commonly referred to as utilization. This means health plans evaluate how often their members are seeing a doctor, being hospitalized, using prescription drugs and other services, and how much these services are projected to cost. Health plans review historical data and make projections based on that data to come up with the premium rate. Additionally, health plans must also consider how much it costs to operate the plan and fund efforts to improve quality of care.

Medical Loss Ratio

Medical Loss Ratio (MLR) is the percentage of premiums that a health plan spends on medical services and quality improvement efforts. Health plans in the individual and small group market must spend at least 80 percent of premiums on medical services and quality improvement efforts. Health plans in the large group market must spend at least 85 percent of premiums on medical services and quality improvement efforts. Plans may use the remaining 15-20 percent of premiums to pay administrative costs to keep the plan running and to generate profit. Administrative costs may include the cost of employees, such as salaries and benefits, as well as office and marketing expenses, taxes, and other fees.

Medical Loss Ratio Rebate

The Department makes sure that health plans meet MLR requirements. If a health plan does not meet these requirements they must issue rebates to their members. Rebates may be issued in a number of ways: